If a beneficiary opts to receive a life insurance death benefit in installments rather than in a lump sum, what are the beneficiary's tax consequences?
Explanation
Answer: B - If a beneficiary opts to receive a life insurance death benefit in installments rather than in a lump sum, the amount of installment payments received by the beneficiary that is in excess of the total amount of death benefit at the insured's death will be subject to income taxation. For example, if the insured's death benefit amount was $50,000, but due to interest received over the installment payment period, the beneficiary received a total of $52,000, then $2,000 will be subject to income taxation. This is calculated as $52,000 in total amount of proceeds received - $50,000 of original death benefit = $2,000 in gain (and thus, $2,000 is subject to taxation).
